China faces a dangerous period of stagflation: Walker

On the walls of celebrated economist Jim Walker’s office in Hong Kong are numerous photographs of him with his prize-winning racehorses. They’ve evidently had good winning streaks, and are manifestly a source of pride and joy for their owner. But it isn’t just at the racecourse that “Dr Jim”- as he’s better known - has a masterly winning touch. The bearded, bear-like - and uber-bearish - economist, who heads Asianomics, an independent economic research agency, has proved disconcertingly right with his grim calls on economies and markets. He famously foresaw the 1997 Asian currency crisis two full years before it exploded; and, more recently, in 2007, when global equity markets were soaring high on a sub-prime housing bubble, he warned of a coming apocalypse - and again proved right on the money.

Today, Dr Jim has just as grim an outlook on the Chinese economy. The avalanche of state-directed lending by Chinese banks in response to the 2008 global financial crisis, which led to a collapse of China’s exports, has, along with other policy errors, accentuated the distortions in the Chinese economy, he says.

In an interview to Firstpost’s Venky Vembu, Dr Jim outlines why this is a “dangerous” time for the Chinese economy.

‘There’s a massive bad debt problem coming’

In this segment, Walker points out that while a banking crisis in China can be postponed, it cannot entirely be averted. “There’s a massive bad debt problem coming,” he warns.

‘China’s expansion is probably finished for a few years’

In this segment, Walker cites a stunning bit of statistic that makes China the country with the world’s most skewed income distribution. “Just 1,300 people in China account for $1 trillion in assets; the top 1.5% of people in China account for 45% of bank deposits and 67% of assets under management in China.” He then explains why it won’t be easy for China to shift from the investment bias in its economy towards a greater balance between consumption and investment.

‘If China’s capital account were open, the renminbi would be in free fall’

In this segment, Walker explains why China can still continue to grow at 5-6% a year over the next decade, but not at its current “nonsensical” pace of 8-10%. But even then, there will be periods when growth will dip to as low as 1% - “and that’s something most investors (in China) don’t have on their radar.”